Perspectives on where our world is heading from a vantage point in Denver, Colorado.

06 December 2010

Musings On Poverty And Government

One of the main activities of government is to address poverty.

Sometimes, this is obvious and direct. Significant government spending goes towards means tested programs to help the poor like TANF, WIC, Food Stamps, school nutrition programs, housing assistance, and Medicaid.

Sometimes, this involves categorical programs, like Social Security and Medicare, that were enacted because large shares of the elderly and disabled prior to their enactment were desperately poor. Without those programs, far more would be in poverty today. Similarly, the biggest anti-poverty program for working aged families is public education.

Sometimes, this is less direct, but intimately related to financial distress. A very large share of all thefts, burglaries and robberies are committed by the poor for economic gain. So too is a very large share of all vice offenses: drug dealing, prostitution, illegal gambling and so on. A significant share of violent crimes, such as most gang related violent crime, are in the furtherance of other criminal activities that are economically motivated. And, there is a significant correlation between domestic violence and economic distress. These crimes require society to have large police forces, drive the size of the court system that is required and require substantial investments in prisons. The crimes themselves, of course, also harm the victims of the society and drive large systemic costs associated with preventing crimes. For example, a significant share of property and casualty insurance premiums arise from property crime claims. Criminal justice also deprives society of the useful labor of the people being punished.

As I noted in a previous post, a large share of child abuse and neglect cases are intimately associated with poverty. The prosecution of these cases, both criminally and to terminate parental rights, is a societal costs, as is the cost of caring for foster children. And, the serious harms that children suffer when they are abused and neglected, often as a result of the poverty of their parents, in turn harms their future prospects, denying society as a whole the benefit of the full potential of these children.

A very large share of all civil litigation involves simple debt collection actions, seeking money judgments or the repossession of property for loan payments or rent payments or taxes that are in default. A small portion of those cases involve bona fide disputes over what is owed, but most involve a simple inability to pay the amounts due when they were due. Most involve not exhorbitant spending, but a decline in ability to pay that took place after the contract in question was entered into by the parties. The predominant form of federal court litigation, personal bankruptcy filings, is also quintessentially one that arises out of financial distress.

Financial distress is also an important cause of divorce which is much more common among the less affluent than the more affluent, and of non-marital disputes over child support. Unemployment benefit litigation (and social security disability litigation) are both driven by financial distress, as is the need for the unemployment benefit program at all.

Mental illness is common at all socio-economic levels, but only among those who lack some college education does it routinely go untreated and contribute to serious criminal activity.

Poverty is expensive for the public, and the poor contribute very little to the size of the economy as a whole. The Marxist view that the rich derive their wealth from the exploitation of the poor is mostly wrong. The rich derive their wealth from a stable society and the gainfully employed members of the working and middle classes. The rich are forced to contribute some of their wealth to the care of the poor because they want a stable society where they can do business. Poverty is a drain on the profits of the rich from which they do not benefit.

In a society where every household had able bodied people with jobs sufficient to meet the basic needs of everyone in the household, everyone set aside savings for retirement and college educations for their children, everyone could afford adequate health care, and every student could obtain and repay loans for educational costs that their families couldn't afford, there would still be a need for a government, but it would be much smaller.

There would always be people who steal or vandalize property for fun or out of impulse or spite. There would always be people who are financially comfortable but engage in white collar crimes to be wealthier. There will always be instances for financially secure families have instances of domestic violence, and child abuse or neglect. There will always be instances of violent actions having nothing to do with illegal economic activity or economically motivated property crimes. Economic justice will not prevent bar fights, or psychopathic serial killings. But, we could have fewer police, fewer prosecutors, fewer criminal court judges, fewer jails and prisons, few child protective services officers, and fewer foster families, probably by something on the order of a factor of ten or twenty.

Means tested welfare programs would dramatically shrink in scale and cost. Some categorical programs like the Social Security retirement program and public tuition assistance for higher education, might be unnecessary. The need for these kinds of assistance might even become so small that private charity, from a more affluent community, could meet these needs adequately.

There will likewise always be bona fide disputes over commercial and consumer agreements, people who borrowed more than they could afford even when they were financially stable, accidents where fault is ambiguous, marriages that irretrievably broken, and unmarried parents who must resolve custody disputes. We would still need most of our government institutions, but they would be far smaller and less costly. Again, the civil side of the court docket might be a factor of ten or twenty smaller than it is today.

There are likewise roles for government that have nothing to do with poverty - providing for the national defense, building and maintaining roads, delivering water and sewage services, operating parks, creating and managing a currency, regulating pollution, and so on, that wouldn't change much.

But, government would be dramatically less expensive, the courts would be dramatically less busy, more families would be stable, and far few people would be victims of crime and abuse and neglect if it weren't for the legions of people who are poor. It would, indeed, look much closer to some sort of libertarian view of the state. But, that isn't the world that we live in today.

Why are people poor? Mostly because capitalism is working as advertised, not because it is flawed. The poor are poor primarily because they can't find good jobs. They can't find good jobs because the economy is ruthlessly efficient in hiring only the people it needs to do the economic work that people who are able to pay can afford to have done for them. Sometimes they are unemployed because the economy, at the going market price for the kind of labor they do, doesn't need what they know how to do at the moment. This doesn't happen randomly, although quite a bit of it is random. Some people have educations, skills and abilities that the economy needs consistently. Some people don't. Those who don't consistently have trouble finding gainful employment, find employment that doesn't pay well when they do, and as a result they and their families are poor.

American poverty is not mostly a result of poor incentives, although our tax and social welfare system do place a mighty burden on those who would seek to make themselves a little better off with higher earnings, as benefit reductions and tax credit phaseouts deprive them of most of their marginal labor on the path to emerge from poverty to the middle class.

But, no other developed economy in the world has such a powerful economic incentive to make a middle class wage, and imposes such harsh consequences for failing to do so. The poor are not poor mostly because they lack an economic incentive to be better off, they are poor because they have less of what it takes to be employable and don't have family members that have those traits.

Government has a sovereign responsibility to establish a system in which all of the essential needs of all of its citizens are met. To the extent that this can be fulfilled by the employment market and self-employed individuals, and through family obligations, so much the better.

But, the reality is that there will also be people whose ability to contribute economically will be insufficient to meet their essential needs. Some people, for example, those who severe mental or physical disabilities, for example, will never be able to provide for themselves and not everyone with these conditions will always have family with the means to provide for them.

What isn't happening now and should be happening to a much greater extent, is what is happening in Denver with homelessness. Denver has acknowledged that it has homeless people who cannot currently provide for themselves and for whom it is responsible. Then, it has looked squarely at that responsibility, asked itself how it can discharge its responsibility to this group of people in a less costly way than its prior piecemeal approach, and determined that providing for people's basic needs for shelter and other assistance is cheaper than the cost of dealing with the consequences of having a population whose basic needs aren't met and face one crisis after another.

This, writ large, is where I think we need to go as a larger society in dealing with poverty. We need to look at the aggregate costs to government of dealing with poverty and economic insecurity in an expansive way and to define the population who needs help in preventing poverty and economic insecurity. Then, we need to look at less expensive, prevention oriented approaches to meeting those needs that are less stingy because they recognize that not meeting those needs will be more expensive overall. For example, while it makes sense to not require landlords to bear the economic cost of tenants who can't pay rent, it makes little sense to have one arm of the government toss people and their possessions into the street, without regard to dealing with the homelessness problem that is created at that moment, but will only be addressed by government months or years later.

This is essentially the difference between American style capitalism and the European welfare state. Both have a population who have low incomes prior to government intervention that have been stagnant for decades due to a revolution in the economy that makes less skilled work less valuable relative to more skilled work. But, the social welfare states have decided that adjusting tax and benefit program policies to prevent an underclass from arising is a more cost effective and societally worthwhile approach, while the American system has made these concessions only kicking and screaming when poverty seems overwhelming or tight state budgets compel a new approach.

Generous unemployment benefits, for example, lift large numbers of people who might need a variety of kinds of assistance in the face of hard economic times, into self-sufficiency apart from this one benefit, and prevent a variety of other costly social ills.

It isn't entirely clear why other countries have dealt better with the question of poverty than the United States, although the much larger share of the population that votes in those countries, and much better job that their political systems do of translating the popular will into political power may be an important factor.